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TMI Blog1988 (3) TMI 399X X X X Extracts X X X X X X X X Extracts X X X X ..... e respondent-company has raised an objection as to the maintainability of the petition. The petitioners say that-the respondent-company was incorporated in June, 1970. The share capital of the company is Rs. 50 lakhs, divided into 10,000 cumulative redeemable preference shares of Rs. 100 each, and 4,00,000 equity shares of Rs. 10 each. The three petitioners hold 1,000, 1,800 and 2,200 redeemable cumulative preference shares, respectively, of a total value of Rs. 5 lakhs. These shares, carrying a dividend of 9.5 % were issued on January 7, 1971, and were redeemable at par after 15 years from the date of allotment. The date of allotment is February 8, 1971. When the petitioners asked for redemption of the shares, the board of directors, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legations with respect to negative financial position and other defaults are denied. The first question that has to be answered is whether the petitioners being preference shareholders can call themselves "creditors" and ask for winding up of the company under section 433( e ) read with section 434(1) and section 439(1)( b ) of the Act. Ordinarily speaking, shareholders are not creditors. But, the contention of Mr. T. Anantha Babu, learned counsel for the petitioners, is that the petitioners are holding preference shares which are redeemable 15 years after the date of allotment. These shares carry a fixed dividend of 9.5%. When the petitioners called upon the company to pay the amount due on the said shares, the company was unable to pay, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated at a fixed rate, which may be either free of or subject to income-tax; and ( b )that as respects capital, it carries or will carry, on a winding-up or repayment of capital, a preferential right to be repaid the amount of the capital paid up or deemed to have been paid up, whether or not there is a preferential right to the payment of either or both of the following amounts, namely: ( i )any money remaining unpaid, in respect of the amounts specified in clause ( a ), up to the date of the winding-up or repayment of capital; and ( ii )any fixed premium or premium on any fixed scale, specified in the memorandum or articles of the company". It is not necessary for the present purposes to notice the Explanation to sub-section (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... option of the company. Proviso ( a ), however, says that no such shares shall be redeemed except out of the profits of the company, which would otherwise be available for dividend, or out of the proceeds of a fresh issue of shares made for the purposes of the redemption. This aspect, in my opinion, shows that where redeemable preference shares are issued but not honoured when they are ripe for redemption, the holder of those shares does not automatically assume the character of a "creditor". The reason is that his shares can be redeemed only out of the profits of the company which would otherwise be available for dividend, or by a fresh issue of shares. This is a limitation which is not applicable to the case of an ordinary creditor. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 356): "The outside investor may be induced to subscribe for preference rather than ordinary shares by reason of the bargain offered; such investor has usually little knowledge of the company's business, has no wish to participate in the company's management and is keen only on his promised return. It may also happen that if the companies want to raise new capital when their existing shares are worth less than the nominal value the only direct way of raising new capital, apart from borrowings and debentures, will be to issue a new class of shares with preferential rights over the existing ones. The preference shares are really part of the company's share capital; they are not loans". Relying upon the last sentence in the above extract, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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